Experiments with money

3 experiments with money

by Roman on May 29, 2008

I am a big fan of behavioral economics which tries to explain why people act the way they do.

Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.

The Ultimatum Game

You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him – you will both get to keep your share of the money. If the other person declines – neither of you get the money.

This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.

A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him – he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B – the second person should accept. Rationally looking it is better to get 1 dollar than nothing.

What really happens?

Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) – you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.

Perceived value of money

The following is a thought experiment. Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same.

Which option will most people choose? A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option – being richer than other people. Some scientist think this experiment demonstrates the irrationality of man. I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends – it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.

The Line Experiment

The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars. A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person. Which would you rather be? Surprisingly most people would choose the first option – getting the $100. Money wise this is a bad decision – you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000

What do these experiments show

These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.

Find the places and areas of life where people make these decisions, play your cards right and you will get to keep their money.

If you liked this post there is a good chance that you will find something of interest on my insights page where I post short reviews of longer articles about the rules of making money:

Insights to money and how getting rich really works

Illustrated Guide to Reading People’s Faces

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Klebiits » Blog Archive » par to jautājumu par naudu
July 19, 2008 at 3:30 am

{ 33 comments }

Adam Primero May 29, 2008 at 10:01 pm

You knew I would comment on this one didn’t you Roman?
Logic vs. analogic, also known as emotion or feeling. People, men, women, children, are all motivated by emotion. No mater how they twist it to say “I bought it because it will preform…) No, you had a need, it filled that need. Needs outside of food, water, and shelter are driven by emotion. Some would argue even those are emotional. The quest is to find the emotional trigger. In your report, there are two, one was the feeling of being taken advantage of(I’m sure theres a word I cant find here) on the second it was Status. Both of them(3) played on fear to gather results. People are only going to run towards something, or away from something. Your objective is to catch them in the middle. You could present a problem, they will perceive as their own, and then offer the solution(for a fee of course).

Roman May 30, 2008 at 2:11 am

When I was younger I always thought that everyone are rational.
After being a door-to-door salesman for about 8 months I know for a fact that everyone is emotional. Even the most rational decisions are made based upon emotions.
For example if you take a multi-billion company then their management board makes a lot of decisions to make more money! They are motivated by greed to get more and by fear to lose their money and positions in the company.

MoneyEnergy May 30, 2008 at 12:16 am

Great post, one of your best yet I think. I don’t see so many bloggers writing on this general topic area, so I think it could be a good niche for you.

I’m happy to say that in the two thought experiments that I tried for myself, I made the “correct” rational choice each time:) LOL

Roman May 30, 2008 at 2:08 am

MoneyEnergy, there is hope for you to get rich! :lol:

If you liked the post, maybe you can make me a small favour and Stumble it!

Adam Primero May 30, 2008 at 8:18 am

Consider it stumbled upon!

Roman May 30, 2008 at 9:48 am

Thanks a thousand! If this traffic keeps up, it will become my best day in terms of traffic!

My record so far is about 739 unique visitors a day, right now I’m standing at 540. If we break the 1000 mark I will also do an overview of how it happened!

zEro XK May 30, 2008 at 9:00 am

Very interesting post! Keep writing about this topic! I stumbled it.

Roman May 30, 2008 at 5:38 pm

Thanks a lot zEro XK. I’ll try to do the best I can! :)

Dusty May 30, 2008 at 9:59 am

“Money is the root of all evil”

It’s fine to look at it from a cold, scientific perspective, but more interesting from a moral one.

Roman May 30, 2008 at 5:39 pm

Yeah, if you take morals into account everything can seem a lot different…

dougfoot June 26, 2008 at 12:46 am

It is the “love” of money that is the root of evil, not money in of itself.
The desire to be wealthy is not an evil desire – the evil is putting this desire above all else.
If one is charitable with their wealth (tithe, giving to charity, giving to the poor) what does it matter how much a person earns? There are many who are wealthy and you would never know it. Their focus with their wealth is to help those in need versus with material goods.
The most selfish people I’ve met are those who are not charitable – they beleive it is the government’s role to assist the less fortunate – on the backs of everyone else (taxes).
If a person wants the force of government to make people “charitable” (sharing their wealth) that person is at least a socialist at worst a communist.

Don February 19, 2011 at 9:23 am

Thinking about money as an economist or “scientifically” as Dusty put it has clearly proven more interesting than a moral understanding. Granted, trying to understand people’s behavior and decision making process is important to try and interpret but not at all more important than people actually understanding WHAT they’re doing–Rationality– rather than WHY they are doing it–Irrationality. Yeah it’s nice to think we live in a world where we can always make the choice that makes us the most happy but that’s ignorant. That’s why the biggest economies of the world are all suffering right now; everyone got so used to a comfortable lifestyle that they refuse to give it up. It’s very easy to get caught up in the Short Run outcome but it’s essentially very straightforward to fix a declining economy if we think about the Long Run. The statement “money is the root of all evil” is in itself, where the evil starts and grows. Rational thinkers are motivated by an understanding of monetary and fiscal policies and how economic interactions apply to their own profit maximizing model. Irrational thinkers are motivated by greed and fear and love and all other emotions you want to bring up and these initial motives cause them to grow larger and larger as fears and pessimism grow. In no way whatsoever does it make sense for someone to take less money just so they can have more than people around them, heteris parabis. (this is obviously a hypothetical model as price levels and the value of the dollar would also change). The second option would increase household/firm consumption and stimulate the economy even farther, leaving yourself infinintley better off than had you chosen option A. This is the reason US is facing the worst recession since the 1920’s; because people don’t understand how to think rationally or just don’t try to. Irrational thinking isn’t human nature; adaptation and overcoming obstacles is. “You’ve got to swallow the bad tasting medicine now if you want to get better in the future.”

subramaniam shankar May 30, 2008 at 1:55 pm

Money is the most significant discovery by mankind and it is a significant source of mental balance and inner security.Philosophical detachment to money and the evils associated with too much of it,catches attention with limited opportunity to spend it satisfactorily.however,being rational and making the best of what is available seems logical and an obviously intelligent choice.In the experiments you can add one more dimension that is ethics.Yes,billion dollar companies want to pile on more billions and this is apparently rational.A saner hard look will set in motion a process of introspection and this is where the line between reason and logic gets clearer.It is good to have money any way so long one could sleep well and peacefully with lots of it and more pouring in

Roman May 30, 2008 at 5:37 pm

I totally agree with the ethics thing. While ethics can play a vital role on our everyday life huge companies seem to lose their ethics and are just about willing to do anything that makes them more money! That’s probably because big companies hire only the best of the best – the people who bring in the most amount of money. The thing is that its a lot easier to become a big player when you lose some of your ethics!

John Smith June 1, 2008 at 12:35 pm

Same old crap all over again..

What is the relevance in an experiment where you’re asked which one would you be, when you’re not actually getting any money.

Or hypothetically asked if you’d take 100k or 200k depending what others get… if offered REAL 100000 dollars or 200000$ I’d doubt people would give a shit if the person next would get double or triple that abount…

dave September 10, 2011 at 9:56 am

I 100% agree.

Blip June 25, 2008 at 2:23 am

Is there an actual scientific study supporting these hypothesis? What is most people-51%-99%.
I picked all the rational answers and would think most others would, too. Of course, I could be wrong.

Roman June 26, 2008 at 12:10 am

The fact that you were reading this article and this blog already makes you stand out of most people Blip!
It means that you have the ability to make rational decisions money wise (or at least that you are striving to that direction)

Doug June 25, 2008 at 12:21 pm

Individuals are often called rational if they tend to act optimally in pursuit of their goals. Without knowing the goals, you can’t know if a behavior is rational or not. In all three experiments, a goal is assumed, then subjects are described as “irrational” when they do not appear to have this goal. It is not irrational to have goals other than income maximizing. In fact, maximizing income is at best inadvisable, as it commonly conflicts maximizing such goals as survival, happiness, health,and security. “It is better to get $1 than nothing” no matter accompanies the dollar?

Roman June 26, 2008 at 12:04 am

Doug, I think your comment shows great insight!
Just because one makes an irrational choice from the point of maximizing your income doesn’t mean that this choice was irrational – maybe the person did exactly what he wanted to do and got what he wanted!

Nick June 26, 2008 at 12:47 pm

This is a great post and makes some very good points, but I wonder how the experiment is presented and set-up. I think if people who are subjects of the experiment really know what is going on, then their response would be different than if they didn’t know.

There’s a name for that as well, I just can’t think of what it is…where people act differently when they know they are being watched.

Sharad Khandelwal July 13, 2008 at 11:19 pm

Thumbs Up. Man choses the option which builts his ego.

But,to reach God,you should not have any ego.

Kayong Kagaguhan August 15, 2008 at 3:35 pm

being look for a long time for that 200,000 is it still an offer? i like to take it.
Yeah right, there no such thing, a thought experiment. don’t really happen.

Bransby September 22, 2008 at 8:56 am

I think you make a good point about the social positioning being more important to people than the money in the second experiment, but I’m not sure that I’d call the desire for social position rational.

Roman September 22, 2008 at 9:24 am

I agree, Bransby – the rationality of a high social position is entirely debatable!

Trevor January 9, 2009 at 2:06 pm

Interesting article…

Roman January 9, 2009 at 2:10 pm

Thanks Trevor!

jean michel February 17, 2009 at 2:09 am

I decided to sail away as much as possible from it, but it’s all over the planet, good luck for this crisis..

Alain April 15, 2009 at 2:39 pm

“It is the “love” of money that is the root of evil, not money in of itself.”
I do not totally agree.In sense that I partially agree.
I belive…this is a WONDERFUL EXCUSE to round around the truth!
Question:
If the “love of money” is the “root” of evil…what’s the “SEED” in this botanic example? and what are the fruits that makes other seeds etc?
“money makes money” ave you ever listen this?
You are translate the problem around a circle thinking to have the “magic formula” in the pocket. Actual economic system BUILT upon and around the concept “money” is falling down….and you continue to think “OH NO! money IS A GOOD THING!”… These experiments SHOWS how people have a distort perspective of money. Distorsion magnified by tv-spots and generally by society.

Roman April 17, 2009 at 9:15 am

Thanks for your insight Alain!

premium finance May 7, 2010 at 4:01 am

Good articles on the experiments with money and very informative site!!

Nate December 10, 2010 at 9:46 pm

I disagree with the interpretation of experiment 2. Depending on how you define “everyone around you” the first option could be much better than the second. If everyone literally means everyone around me in, say, a 1000000000 mile radius then the first option gives you a situation where the every person earns half as much as you do. The price of goods and services is related to the wealth of everyone in the economy. In the first situation the average real income is much less than the average real income of the second situation. This turns the question into would i rather earn double or half the average real income of the economy I live in. Would you rather have 100 dollars to your name and live in a society where goods and services on average cost 1 cent or have 10000 dollars to your name in a society where goods and services on average cost 5000.

dave September 10, 2011 at 9:28 am

The $100 ultimatum game has no real value

Lets say the only difference to my altered version is instead of $100 its $100,000. (or this would work with even $10,000)
If person ‘A’ wants to keep $70,000 and offers $30,000 to person B. (70-30) As a one time offer. And the referee asks person B on whether they agree or not.
-Mostly everyone needs $30,000 so who in their right mind would turn down $30,000??? The fear of losing such a large sum would spark the self interest in a person more than some irrational moral anger. This is what person ‘A’ banks on.

Person B is left with a choice…. it all comes down to him. What will he do?? Take $30,000 or nothing?

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